For those unfamiliar with hedging strategies it is the practice of getting paid today a fixed price for a commodity you deliver some time in the future. Goldman Sachs and other investment banksters have convinced many gold mining firms to hedge their gold production as a means to raise revenue due to low gold prices.

In the gold market the mines hedged, hedge funds hedged, central banks lent gold reserves as collateral for the banksters to lease as collateral for gold short sales. They were successful as long as the price fell and they could profit by covering their short at lower cost or prices stayed in a narrow range and they could roll the expiration of their short sales forward in time.

Trouble is now there is over 4 years of global gold production sold short. And with todays action in the bond market - Japanese dumping T-Bills and US Treasury buying in huge volume - inflation is very likely to push the hedge books and short sellers over the cliff.

The following email alert just in from Bill Murphy at Le Metropole:

"CLASS ACTION LAWSUIT FILED AGAINST ASHANTI OFFICERS AND BOARD OF DIRECTORS " "A class action lawsuit was filed today by a New York law firm against the Board of Directors and officers of Ashanti Goldfields Co. in Ghana, Africa. It is for shareholders that purchased Ashanti stock between July and October of last year. The details will be all over the press tomorrow."

"This is a big event for the gold market. In essence, the suit was filed because of their excessive hedging policies. That now puts all Board of Directors of gold producers that they are on notice that they will be held accountable if the hedging policies of their firms are overly aggressive and subject the shareholder to penalties as a result of a rising gold price."

"YEAH!"

"If the supposed smartest minds in the gold world - the investment bankers led by Goldman Sachs were advisors to Ashanti - and they blew it - how can any Board of Director of any gold company be comfortable with any kind of excessive hedging structure for a company that they oversee? Almost no one thought the $84 price rise in late September was possible. That fast a price rise was not even put in the computer models that were presented to the Ashanti officers for option volatilities by its Goldman Sachs advisors."

"Yes, indeedee. This is big news for the big picture. With 10,000 tonnes of gold loans outstanding, what are the shorts going to do if a bond market run up like today occurs in the gold market again. Another yen type move! Another $84 gold type blitzkrieg move! What if that move is $284 in gold next time? Yen could be found. Money can be printed. Gold? Is the United States willing to donate the 8,000 tonnes we supposedly have in Fort Knox (or under Fed/Treasury auspices) to bailout the collusion bullion dealer crowd? How will Greenspan and Summers explain that to the Congress and the American public? How will the dollar fare in that type of scenario? Yikes!"

"Hello Barrick Gold. I have a question. When is your next hedging seminar planned for your Board of Directors?"

Le Metropole Cafe

-- Bill P (porterwn@one.net), February 03, 2000

Answers

Heh, good post Bill.

-- Hokie (Hokie_@hotmail.com), February 03, 2000.

Bill: Please explain. I am somewhat a newbee at this and don't understand the situation. I guess the bottom line is that gold could go wacko the next few days/weeks? Do you think the Fed will be trying to hold the price down by selling off some of the 8000 tonne reserve? I guess what I don't understand is why the Fed would want to protect the hedging types. Could you explain how that would work? Thanks... I convinced my mother in law to buy $10k in gold last year as a hedge, and now it is burning a hole in her pocket. What can I say to get her to hold off selling out a few more weeks???

-- DannyBoy (Wondering@gold.mkt), February 04, 2000.

DannyBoy,

Bill: Please explain. I am somewhat a newbee at this and don't understand the situation. I guess the bottom line is that gold could go wacko the next few days/weeks? Do you think the Fed will be trying to hold the price down by selling off some of the 8000 tonne reserve? I guess what I don't understand is why the Fed would want to protect the hedging types. Could you explain how that would work? Thanks... I convinced my mother in law to buy $10k in gold last year as a hedge, and now it is burning a hole in her pocket. What can I say to get her to hold off selling out a few more weeks???

In last "Asian flu" financial crisis in 1997 and 1998 that led to the support of Indonesian and Thailand currency systems and the US bailout of US hedge fund Long Term Capital Management, the FED (Greenspan), the Sec Treas (Rubin) and major investment banks(Goldman Sach and others) were able to jointly manage the bailouts and resuce the system. This level of cooperation was helped by the fact that Sec Treas Robewr Rubin was formerly a Managing Director of Goldman Sachs prior to his arrival at US Treasury.

In 1999, the FED, US Treasury and other countries central banks all injected cash liquidity into the money supply to meet Y2K demand. They did this by using a short term bond swap repurchase agrrement where the govt issued cash in return for govt bonds held in as assets by banks. This increased the money supply and helped fuel the stock market rise in late 1999 erspecially bubble.com.

To address the inflationary effects of the Y2K cash infusion and the runaway prices on the .com tech stocks, the FED on 02/02/00 raised interest rates by 1/4%.

This rate rise was factored into the stock,bond, futures positions by the traders well prior to the announcement, ie the rate increase was no surpirse to Wall Street.

The effect of rising rates lowered outstanding bond prices as outstanding bond were repriced to market to compete with the new higher rate.

It appearsd that this rate rise and the liklihood of future rate rise prompted the Japanese to sell they extensive holdings of US govt bonds which were bought by the japanese at a time of lower rates and higher prices. Recent US bond purchases by the Japanese may have shown a loss of prinicpal. The Japanese appear to have decided to issue their Japanese yen based bonds to replace the Japenese investors appetitie for savings via US bonds.

It appears that the US Treasury (now led by Larry Summers as Robert Rubin resigned late last year) acted on its own without consult with the FED and the investment banks began yesterday to redeem the long bond. A possible reason for this is that the US govt did not want the volume of Japanese bonds to flood the market which would depress bond prices and raise interest rates that affect the US gov ability to finance our huge federal debts.

Most banks and hedge funds were caught by surprise because they have their portfolios positioned to bet against a rising inflation rate. They have done thsi by selling gold short in the expectation that gold prices will remain flat.

The action yesterday by the treasury redeeming gov bonds is inflationary as it replaces the outstanding long bonds with an excess supply of printing press dollars. A weaker dollar will drive up costs of real goods including gold. This exposes the gold shorts to extreme financial liability.

For the future it remains to be seen what the actions by the major players (Japan, USA, Euro markets and OPEC) do. The Euro could rise vs the dollar and OPEC may want more dollars for their oil or payment in some other currency for international trade like the Euro or an OPEC idea of a gold backed Dinar. Given this weeks action following so close on the heels of the Tokyo G7 economic summit of late January, it appears that there is no uniform consensus among world leaders and confusion and market volatilty reigns.

It is possible that yestersdays action was just a small action by the US Treasury meant to reassure Japanese investors that their investment in US bonds is safe or it could be the beginning of a major inflationary cycle. It is too early to know.

-- Bill P (porterwn@one.net), February 04, 2000.